Rokos Market Reports

Industrial rental rates are increasing which has been largely driven by low vacancy rates and a reduced construction pipeline, which fell by over 70% from last year. Leasing is expected to increase in key submarkets like the Northwest due to new construction demand.

Reduced office space needs and the shift to hybrid work has continued to contribute to high vacancy rate. However, rental rates are holding steady. MSP has a 22.1% vacancy rate, with annual rent increases outperforming the U.S. average at 2.8%. Leases over 100k SF continue to decline.

The Twin Cities healthcare real estate market is experiencing steady growth in 2024, mirroring the moderate expansion of the overall healthcare sector. Adapting to evolving trends like outpatient care, telehealth integration, and patient experience will be crucial for success.

In 2023, Minneapolis’s industrial market saw high absorption and leasing activity, with 5.15M square feet absorbed and 15.4M square feet transacted, respectively. Construction remained active, delivering 8.6M square feet, but outpaced absorption, leading to increased vacancy rates.

Shifts in office space utilization and hybrid work led to negative annual net absorption for the fourth consecutive year. This resulted in an all-time high vacancy rate of 21.1%. Twin Cities office market continues to struggle to return to pre-pandemic leasing levels. 2023 leasing volume approximately 20% below the five-year pre-pandemic average.

The second quarter of 2023 showed the strongest leasing activity in nearly two years. With almost 4.5M square feet leased, activity is up more than 20% year-over-year. Still, the market is shifting.

Companies are continuing to right-size– downsizing and consolidating their office space. While this is driving negative absorption in the market, leasing activity is up nearly 40% year over year.

Vacancy continues to inch upward as more companies cement their hybrid or remote work policies and stray from outdated Class B and C properties. Amenity-rich Class A space continues to demand high, rising rates.

Industrial rates are rising despite a dip in new construction. Demand for functional properties in strong labor markets is most prevelant. Despite this demand, much of which is new construction, the construction pipeline has slowed.

Fears of an upcoming recession triggered by inflation, rising labor and construction costs, and rising interest rates have led some to take pause; however, for most businesses, the demand for industrial space continues unhampered.

Office occupancy rose in Q3 as employees returned to the office after Labor Day, although at a slower-than-anticipated rate. Amenity-rich, high-quality office space continues to attract companies looking to lure workers back to the office.

With the onset of the pandemic and the subsequent surge in e-commerce, the industrial market has gone from basic to booming. The first quarter of 2022 solidified that industrial is still hot with few signs of slowing. The unprecedented demand has pushed vacancy to a historic national low.

Major Twin Cities employers, like Xcel Energy and Wells Fargo, officially asked their employees to come back to work. Simultaneously, the office market gained momentum as companies with expiring leases began signing new leases (although typically at a 15-20% smaller footprint).

Leasing activity continues to slowly climb upward as active tenants focus in on high-quality office space. This flight-to-quality trend sees tenants seeking space in newly built or renovated buildings to help influence their employees to come back to the office.

After four quarters of negative absorption, the third quarter of 2021 finally saw a dip in vacancy with positive absorption largely due to new tenants in the Minneapolis CBD. Leasing regained strength with suburban markets having a major impact on market recovery.

The healthcare real estate market has remained strong in the Twin Cities with outlook moving forward looking positive. Healthcare has once again shown that it is one of the more resilient asset classes in the commercial real estate market.